Taxation

This is not a group assignment and is to be delivered in a Word
document only – no Excel spreadsheets. The University of Glamorgan
rules on plagiarism and late submission apply and are available on
Blackboard. The Word document should be submitted via Turnitin on
BlackBoard by Midnight Sunday 30th January 2011. Feedback will be
given by handing back a paper version to you in class in the week
starting 28th February 2011.
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Your client is Mrs Barcelona Mousepocket (Mrs M for short) and she
owns a hotel in Cornwall called Lawfty Restow. The Hotel is renowned
for the ill treatment of its customers who strangely travel miles for
this! She is trading as a sole trader NOT a limited company. She is
married with three children. She has recently received a letter from
HMRC that went as follows:
HMRC
Riviera SW Tax District
Moosehead Village
HOT 33L
30th September 2010
Tax reference: 240 D 134586
NIC no.: AB 34 56 78Q

Mrs B. Mousepocket
Lawfty Restow Hotel
Etc

Dear Mrs Mousepocket,

Lawfty Restow Hotel Accounts year ended 5th April 2010

We have chosen your tax return to investigate. We would like to draw
your attention to a number of aspects, particularly in the comparison
with the previous year’s accounts:

i) In a paper copy of an email that you inadvertently included in with
your tax return, you describe to your accountant the problems you had
in December 2009. You state that your brother’s family refused to pay
for their stay or for any of their food they had eaten in your Hotel,
giving as the reason that your family hadn’t had to pay when you’d all
stayed with them in their house. It isn’t clear at the time whether
the Hotel was full or whether there was spare capacity.

ii) Our investigations department have noted from an advertisement in
the local paper that you are renting out the garage attached to your
Hotel. No rent received appears to have been included in the above
accounts, nor in previous years.

iii) Your gross profit percentage (Sales less purchases) on the sales
of drink you make in the bar in the Hotel is a lot less than your
competitors.

iv) The number of your employees also seems less than should be
required to run a Hotel of the size of Lawfty Restow.

v) Under Sundries you include your membership of The Vampire
Appreciation Society.

vi) In your figure of the wages in the accounts, your accountant notes
that it includes wages in the sum of £40,000 paid to your 16 year old
nephew Rats-Hilda Loombucket. This seems to be a lot of money to pay
to a 16 year old.

Please reply to me within 30 days detailing the exact monetary
adjustments that should be made to your taxable profit for 2009/10 as
a result of correcting the mistakes above, or give reasons why such
adjustments should not be made.

Yours sincerely

Prunella Scales

Officer of the Revenue

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Mrs M has sent the above letter to you asking you to reply to HMRC for
her. She is worried about paying more tax.

You clearly want to interview her about the issues raised in the
Officer of the Revenue’s letter and following your review of the file
have come up with the following points (numbered to relate to the
points in the letter):

i) Mrs M had promised to pay the total cost of her brother’s stay in
the Hotel but this had not been done. No adjustment had been made by
your accountancy firm in the accounts for this. On the plus side
however, you note that the private use aspect of both her and her
family living in the Hotel had been agreed with HMRC and adjusted by
you in the tax computation.

ii) There are in fact six garages attached to the Hotel, though you
were not aware that any of them had been rented out and so nothing had
been recorded in the accounts or the tax return.

iii) You note that in the letter sent with the accounts of 2010 you
had expressed concern about the security of the stocks of wine etc in
the new unlocked store cupboards. You had told her that due to the
pattern of missing alcohol, you suspected any theft was likely to be
by her part time staff. You also remember that Mrs M’s two youngest
children used to often take ice creams and bottles of pop from the bar
and you weren’t sure if Mrs M paid for these items.

iv) You remember during a visit to the Hotel noticing quite a few
students apparently working part time in the Hotel and now you came to
think about it they didn’t appeared to have been listed on the
payroll. You also note that there may be other implications other than
for the adjustment of profits……

v) Mrs M’s membership of The Vampire Society, you’d noted, had it
appeared made her more aggressive (or should that be assertive?)
towards the cliental in the Hotel.

vi) Rats-Hilda was indeed Mrs M’s Nephew and had been paid £40,000 for
his employment over the year.

Required
a) List at least six questions that you would want to ask Mrs M;
obviously you don’t want to ask her for anything that you already
know. There should be at least one question on each letter point
(suggested 300 words). 4 marks per letter point * 6 = 24%

b) As Mrs M’s accountant, draft a reply to HMRC’s letter with
explanations, taking into account the additional information that you
have found out and your imagined answers from your interview with Mrs
M. Clearly there are some points where you will agree with the
Inspector that certain items will have to be added back and some items
where you feel that no adjustment will be necessary. (suggested 850
words)
c) You should also comment separately (ie not in the letter) on the
other implications of mentioned in point iv) of the accountants notes
on page 3 above.

d) Attach to the letter a summary of the NUMERIC adjustments to the
adjusted profit. Make up the numbers. You will have to make up some
numbers! There are no right or wrong numbers. (no word limit) Marks
are as follows for b) to d) together:
Points i) 10; ii) 6; iii) 10; iv) 10; v) 6; vi) 6. Total = 48%

e) Briefly discuss what likely penalties HMRC are likely to impose as
a result of this investigation. N.B. This will depend on your answers
in your letter to HMRC. See file on BB under assessment (suggested 250
words) Total 28%

Remember that:
1. You should not insult your client in any letter to HMRC and should
stick to the facts.

2. You are constrained by the ethics of your profession. You must act
honestly and truthfully.

3. There are a number of possible answers to this so please be inventive.

4. Your accountancy firm was responsible for preparing the accounts
and her Income Tax Return but Ms M would have signed both before they
were submitted to HMRC to say that she has checked them.

5. Any assignments with the same numbers in section c) above or with
the same passages of words, will both be failed and passed to the
Plagiarism committee for their ruling.

6. You may split the 1,500 words in any way that you wish between
parts a) – e) but the total must not exceed 1,500 words + 10%.
Anything over this will not be marked

 

 

 

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